Bankruptcy Alphabet – L is for Life

Life after bankruptcy – what does it look like?

Frequently, I’ll meet with clients who are (understandably) worried about life after bankruptcy. How bad is the worst case scenario? Will I have to live without credit for 10 years? Will I ever be able to rent again? Get a car loan? How about a mortgage?

Clients often associate bankruptcy with being thrown out on the street, all of his or her assets taken away, and picture printed on the front page of the newspaper announcing to the world that he or she filed for bankruptcy. It’s so easy to think that you’ll be branded and you’ll have to wear a scarlet letter around your neck announcing to the world that you’ve filed.

I have news for you. Bankruptcy is about preservation of assets and discharge (forgiveness) of debt. Even though there are a lot of stereotypes and stigmas tied to bankruptcy, it is a perfectly legal and legitimate way for people (and businesses) to get out of overwhelming debt.

Shame, guilt and other emotions about debt

Some of the most common things I hear from my clients are:

I feel so guilty. I feel ashamed.
I am a responsible person.
I never thought I’d end up in this situation.

Being under crushing debt is emotionally draining, puts a lot of pressure on you, your marriage, and your family. (Not to mention, your wallet.) Debt brings up a lot of emotions, and whatever you feel – it’s perfectly normal!

After discharge, you’ll be able to continue to live your life – debt free. All of your future earnings or assets are yours to keep, free from creditors’ claims.

The downside of bankruptcy?

The bankruptcy will be reported on your credit report for up to 10 years. Despite popular belief, this does not mean you cannot acquire new credit for 10 years. Some of the negative impacts of bankruptcy start to diminish as your debt-to-income ratio is improved and your credit score begins to recover.

Most of our clients report being able to get new credit cards shortly after discharge, and in general, you can qualify for FHA mortgage after 2 years.

You may also experience difficulty trying to rent a new apartment immediately after bankruptcy. You can avoid this problem by moving prior to filing. In addition, many landlords will consider overlooking the bankruptcy if you increase your deposit or offer to pay for several months of rent up front. (Read more about renting after bankruptcy here.)

There will be adjustments and challenges. But the point of the fresh start principle that underlies bankruptcy is that there is life after bankruptcy.